Deal Profile/Spotting star potential

Securitisation is not a glamour industry. So it is not surprising that David Pullman's deals for the likes of David Bowie and Holland Dozier and Holland have generated almost more press coverage than the rest of the industry put together. Now, the prospect of Michael Jackson joining this group of issuers could be enough to have executives across the market dusting off their leather jackets and heading for Soho, writes Louise Bowman.

The market for future royalty income securitisation was launched with David Bowie's "Bowie bonds" in February 1997. That deal was put together by Pullman when he was part of the structured asset sales division at Wall Street investment firm Fahnestock & Co. This group was hived off into a division of the company in June this year and renamed The Pullman Group - an indication of how fundamental Pullman's involvement has been to the success of the business.

Despite the attention it attracts, future royalty securitisation accounts for a fraction of the ABS market - and will always remain so. The attraction to Pullman's target audience - which in addition to rock stars includes sports stars, authors and film and TV companies - is not hard to see. It allows the artist to diversify their source of funds, avoid public disclosure of their finances (as the bonds are sold as private placements) and raise cash without having to sell off any of their assets. The attractions of such deals to investors, however, are harder to see. The huge and liquid mortgage and credit card-backed bond markets are a much safer - if less lucrative - bet. Future royalty deals are not for everyone.

The first thing any investor in a securitisation deal looks at is the assets themselves. In the case of entertainment industry royalty futures, there is the inherent contradiction that investors only want to look at really successful, global stars - who, because they are so successful, usually don't need to raise any cash. The market is, therefore, limited to issuers of the calibre of David Bowie, which usually have a specific need for the money - Bowie used the US$55m raised through his securitisation to buy out his manager.

Longevity is one of the most important criteria. "We could not do a deal for someone who is very successful at the moment, like the Spice Girls, as they are a short-term phenomenon," says Pullman. Even a star of the calibre of Luciano Pavarotti does not fit the bill (the opera star has looked at the structure). "Ten or 20 years from now, the big opera star will be someone else," he says.

Thus, the potential market is small and illiquid. The two deals completed so far have been sold to single buyers. The Bowie bonds were bought by Prudential Insurance and the US$30m Holland Dozier and Holland deal - completed in April this year - was sold to Connecticut-based Structured Finance Advisors on behalf of a group of insurers.

But investors are rewarded for their risk-taking. The Single A rated Holland Dozier and Holland bonds carried a coupon between 7% and 8% for a 15-year expected maturity - 10-year US Treasuries pay 5.44% and a comparable Single A rated corporate bond pays less than 7%.

Pullman is now addressing this problem by pooling intellectual property assets to gain access to a larger pool of potential issuers. "Pooling intellectual property rights enables much smaller tranches to be structured for each artist - these tend to be US$25m pools," he says. "This opens up the market and makes many more deals possible." Investors like pooled deals as they reduce their exposure to any one artist.

I love rock n' roll

The Pullman Group closed a deal in November for a pool of artists including Rod Stewart, Heart, Kim Carnes, Pat Benatar, Eddie Money, Tupac Shakur and Notorious BIG. Pullman has also recently concluded a deal with songwriter Jake Hooker for a pool of hits from artists including Joan Jett. These are all issuers that would not be able to tap the market on their own. Pullman has recently hired a team of music industry professionals to give him the cutting edge in forging contacts within the industry.

Reducing exposure to a single artist is a big concern for investors. Few have an intimate knowledge of the music industry and therefore rely heavily on the advice and opinion of the rating agencies. The risks they are taking on are very different from other future flow securitisations - and differ from deal to deal.

One of the hardest risks to price is the fact that the investor is not only buying into an artist's back catalogue but into the artist themselves. Investors in future royalty bonds are, therefore, running a high risk that an unforeseen future event could catastrophically affect the performance of the portfolio.

These types of concerns often kill deals. For example, Pullman considered a US$20m deal for Frank Thomas, first baseman with the Chicago White Sox. "The deal was based on his contract," Pullman explains, "but was pulled because there were simply too many 'outs'." These included the fact that the star had to stay physically fit, he could go on one strike and the entire league could be suspended or "locked out" due to an industrial dispute - as the basketball league (NBA) is at the moment.

The proposed deal with Michael Jackson involves a portion of his catalogue of Sony ATV rights and will carry a Sony corporate guarantee. It will not, therefore, be a risk based on the artist. Jackson's record sales have suffered since he was the subject of child abuse allegations -- a graphic illustration of the kind of risks that investors run on single artist deals.

Given the amount of publicity these deals attract, it is remarkable that just two deals have so far been done. Pullman retains his stranglehold on the market partly because the deals are private placements and, therefore, very hard to copy. The other reason is cost. "We have spent seven figures developing the legal documentation for this," he explains. "We have front-loaded the cost, which makes it very hard for the competition to break through. It is not the kind of asset that you can throw 100 people at - it is phenomenally expensive."

After the Bowie bond was launched in 1997, interest in the product was enormous. A one-day conference on securitising entertainment industry revenues attracted more than 400 delegates. Several houses, including Nomura and Bear Stearns, set up teams to concentrate on intellectual property bonds, but little progress was made. Nomura closed a US$15.4m deal for Rod Stewart in April this year, but it was a securitised loan rather than a true asset-backed bond issue.

"We passed on this deal because the rate was too low. It was done off EMI's credit, not Rod Stewart's," says Pullman. And the Pullman Group's position remains secure. "We simply do not have any competition as no-one else has done a deal yet," says Pullman. "We will only have competition when that happens."

Despite the potential of intellectual property rights pooling, Pullman insists he will continue to focus on single artist deals. "We are working an another deal for a songwriting team and a TV syndication rights deal is also in the pipeline," he says. But asset pools such as the November deal are the way forward for the future royalty market - and may yet entice some other players to the table.

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NM Rothschild, advisors to the government on the sale of the second lot of student loans, is getting ever closer to choosing a buyer. A source at Rothschild says that they have produced a shortlist of three bidders consisting of Greenwich NatWest (who won the bidding war for the first lot of student loans, the THESIS 1 securitisation), a consortium made up of Deutsche Bank and Nationwide, and Barclays Capital. Rothschild is expecting to select two candidates by February 1999, and to complete the sale by March, after which they will be gearing up for their third sale of student loans, expected to be completed in late 1999/2000.

The surprise cancellation of Marston, Thompson & Evershed's extraordinary general meeting on December 9 may have put the final nail in the coffin of Nomura's troubled £137m securitisation plans for the company. The deal has been the subject of intense press scrutiny ever since rival brewer Wolverhampton & Dudley launched a £262m hostile bid for the company in November. Wolverhampton & Dudley upped the stakes in the deal by making their 282p-a-share offer conditional upon Marston's securitisation plans being scrapped. A vote on the two proposals was to have been taken at the EGM, but its major institutional shareholders forced Marston's hand by stating that they needed more time to consider the two proposals - and that if the meeting went ahead they would vote down the securitisation plans. The Nomura deal involves the sale of Marston's 569 tenanted pubs to the Japanese bank's principal finance group (PFG), which already has an enviable record in the UK pub sector. But Marston's shareholders feel that the rival Wolverhampton & Dudley bid may represent better value and are angry at what they feel was the company's attempt to force their hand at the December 9 meeting. They are also unhappy at the fees that the company is now obligated to pay Nomura - even if the deal is totally scrapped. The postponement of the meeting has cost the company a total of £6m - £2.5m in fees to Nomura (and others); £1.6m in hedging costs; £600,000 for credit rating and another £1.6m for tax and legal advice. The amount could rise to £10m if the securitisation deal is pulled. This is the first time that PFG has had a high-profile deal blow up in its face after an incredible record of success. But it has not dented the group's enthusiasm for the brewing sector. Even as the Marston deal was unravelling in early December, Nomura announced plans to buy 1,400 tenanted and franchised pubs from another UK brewer, Greenalls, for £375m. It has also revealed that it is to float a new chain of 2,600 of its pubs on the London market in 2001 as a single entity- the Unique Pub Company. Nomura is understood to have beaten East Anglia-based brewer Greene King to the Greenall deal, but the latter may yet get its revenge. Despite their lack of enthusiasm for securitisation, several Marston shareholders are believed to think that Wolverhampton & Dudley's offer is too low. Greene King has been widely suggested as a "white knight" buyer should that bid also fail.

A few issuers braved the securitisation market during the fourth quarter, but most decided to wait until January, with the result that a sizeable backlog of offerings has built up. That supply of paper may cause some choppiness on the market, but the view is the securitisation market has survived the shocks of August and September, and institutional investors are once again hungry for paper. Michael Marray reports. "Early autumn you couldn't do much, but the market came back and people who were desperate for money did deals, though most people didn't want to pay the higher margins," said one UK-based banker. "But we are all paying into our pension fund and life insurance plans, and in January there will be a wall of new money waiting to be invested somewhere." "What we have done is postpone the launch of deals we are arranging until next year, and concentrate upon doing as much of the structuring work as possible," adds a banker based in the US. "Spreads are wider than most issuers would prefer; a lot of investors are sitting on the fence. Most issuers are happy to wait until the insurance companies have fresh money to invest in the first quarter of 1999 and, with the 10-year Treasury at 4.75%, the underlying pricing is still quite attractive, even with spreads a little wider than they were earlier in the year." A few high-profile issuers have attempted to press ahead with deals in December, notably Mexican state oil company Petroleos de Mexico and Formula One Holdings. Pemex was well-received, though Morgan Stanley's deal for Formula One has run into a lot of problems (see box). Perhaps the end of 1998 was not the right moment to bring a new and complex deal such as Formula One to market, and bankers say the majority of first quarter 1999 offerings will be more conventional asset-backed deals, with a flurry of equipment lease and car loans transactions expected out of Japan. The big question is pricing. Though the international bond markets have settled down, the overhang of securitisations being carried over into 1999 may cause problems for some issuers. Spreads in November were well above levels seen early in 1998. For example, the US$290m OSCAR Funding Corp III deal, backed by Japanese auto loans and led by Dresdner Kleinwort Benson, was launched at 60 basis points over Libor. "Sixty basis points is unbelievable value for Triple A paper," says Simon Best at ING Barings in London, who notes that this was 30 basis points more than investors received for OSCAR I when it was launched earlier in the year. But Best believes that spreads will not widen out any further. "We have seen a sharp price correction in this quarter, which is likely to be enough to set the bottom of the market," he says. There is likely to be a large number of issues out of Japan during the first quarter, since many companies are anxious to come to market before the end of the Japanese fiscal year in March, thus tidying up their balance sheets. One securitisation player estimates that as many as 40 Japanese deals are in the pipeline. Most will be backed by pools of leased equipment, though investment bankers are also working on some mortgage-backed bonds and collateralised loan obligations. Legislation recently passed in Japan will help further develop the market, though some legal points remain unresolved. In contrast to 1998, deals structured with a contingent perfection clause are unlikely to feature in the coming year, both because of regulatory changes and investor concerns. Contingent perfection was in any case a controversial subject amongst the rating agencies, and Standard & Poor's had declined to rate issues utilising this structure. "With contingent perfection the concern that we had was that people were trying to borrow at Triple A rates, but the bond-holders didn't have anything, unless the issuer was both willing and able to perfect the security in the assets prior to becoming insolvent," says Kurt Sampson at S&P in London. "So why do

The market turmoil in the final quarter of 1998 is thought to have resulted in the postponement of up to half of the issues in the UK market. Nevertheless, London's securitisation professionals are confident the market will return quickly to normal, and hopeful about the impact of EMU. By Louise Bowman. "The correction in credit spreads [in October] was the most dramatic I have ever seen. It was massive." Graham Andersen, managing director fixed income at Barclays Capital, is not alone in this view, and securitisation executives in the London market are still working out the ramifications for the industry. The ongoing turbulence in many emerging markets in mid-1998 hit the UK securitisation markets early in October, when extreme volatility in the bond markets stopped many deals dead in their tracks. "During the three weeks from October 5, there was the worst volatility in the Gilts market that I can remember," says Steve Skerrett, head of principal finance at NatWest Markets. "Yields jumped 1.5%." Although exact estimates are hard to come by, several players reckon that at least 50% of deals in the market were postponed as a result. One proposal that ran into trouble was NatWest's MBO financing for Ushers of Trowbridge. The bank was working with venture capital group Alchemy Partners on a £116m takeover deal. "Overall, Alchemy needed to raise about £180m, of which the proposed securitisation would have been around £125m," says Skerrett. In September, the all-in cost of funds for the fixed cashflow transaction was estimated to have been around 6%, but after the volatility in October this had shot up to 8%. "After rates had moved so quickly, it meant that we would only have been able to raise £115m." The negotiations - which were only ever exploratory - were therefore abandoned. The scrapping of the Alchemy deal at the end of October received much press coverage and was cited by some as a death knell for securitisation in the UK. The deal was undoubtedly high-profile, as it would have been the first public to private acquisition of a whole company, and it was regarded by some as the tip of the iceberg in a market that was disintegrating by the day. Hitachi Credit UK, a regular issuer, postponed a £100m deal on October 23, with managing director David Anthony commenting: "Securitisation has become less attractive . . . we can finance at lower cost through MTNs." Three days later, Charterhouse Development Capital director Malcolm Offord was quoted as saying: "There is no market for securitisation right now" in relation to his company's acquisition of London tourist attraction Madame Tussauds. Not surprisingly, bankers throughout the City deny that things ever got that bad. The general consensus is that a little blood-letting in an overheated market was long overdue and that things will be back to normal by the end of the first quarter of 1999. "In the long run these corrections are good for securitisation," says Andersen at Barclays Capital. "In June, the general view was that there was an excess of capital - which means that issuers tend not to manage their balance sheets well. When there is a shortage of capital, securitisation is part of better capital management." But there has been an impact in several areas of the market that may take some time to reverse - if at all. The most immediate impact of any market downturn is a flight to quality. This has been firmly in evidence since October in the UK securitisation market, with investors in non-Triple A deals now extremely thin on the ground. This is not to say that the sub-Triple A market is not moving - it is - and several deals have closed since October. Motorway service operators Welcome Break and RoadChef have both launched successful deals. The deals that got done Welcome Break's £55m tap issue of its £321m August 1997 deal was launched in the last week of October and hailed as a triumph in a market virtually closed to such issuers. The deal is Single A and is a good indica

In November, RoadChef launched £210m of fixed and floating-rate notes, secured on the income stream from its UK motorway service stations. RoadChef is the third-largest UK operator of motorway service areas (MSAs), with a market share of 25% (by number of sites). It operates 17 MSAs and 10 lodges adjacent to motorways. By Francesca Murra. The deal was similar to last year's Welcome Break secured bond issue (see the deal profile in ISR November 1997). Commenting on how the deal sold, Richard Mann, director, debt syndication at Barclays Capital, said: "We were conscious of a degree of confidence returning to the markets" following the volatility encountered after the Russian crisis. "UK investors were beginning to show interest in corporate names which were returning to the market." Barclays Capital established this was a strong enough basis on which to proceed with the financing as RoadChef was a good credit story and market conditions were good. In July 1998, RoadChef acquired the Blue Boar Group and the Takeabreak Group, adding four new properties to the pool. Apart from RoadChef, there are only two other big players in the UK, Welcome Break and Granada, however they are not in direct competition, says a report from Fitch IBCA. The group's revenues are derived from the trading activities of the motorway service areas, arising from five main business lines: fuel, catering, retailing, accommodation, and games and other services. According to Fitch IBCA, the strength of the company lies in: restricted competition, high barriers to entry, diversified properties, captive customer base, increasing vehicle use and turn-in rates, and strong management. Further, the MSAs' stable and long-term cashflows make them ideal for securitisation. The proceeds from this deal will be used to refinance a debt facility of £195m provided by Barclays Capital. Nikko Europe's principal finance group and Cabot Square used £175m to acquire a controlling stake in the RoadChef motorway service business and £80m was used to finance RoadChef's subsequent acquisition of Takeabreak and Blue Boar. The balance was provided by equity from Nikko and RoadChef's management. The bonds were issued through RoadChef Finance Ltd, a limited company incorporated in the Cayman Islands and a wholly-owned subsidiary of Road Chef Motorway Holdings Ltd, the holding company for the initial borrowers. The proceeds of the notes were then lent to three sister companies, Road Chef Motorways Limited, Blue Boar Motorways Limited and Takeabreak Motorway Services Limited. One of the principal characteristics of the financing was the secured loan, a departure from the traditional ?true sale' premise on which securitisations are usually based. Although, in the past few years, there have been more and more of these deals emerging in the UK (Welcome Break, Canary Wharf, Haven Funding Plc etc), Mann describes the structure as "securitisation technology applied to a corporate bond". The secured loan structure allows operating companies that rely on administrating their assets in order to grow revenues to continue doing so. It therefore gives management the flexibility it requires to operate the business. With respect to security, the notes were covered by a first-ranking mortgage of the freehold, heritable, and leasehold interests of each initial borrower in all 17 MSAs and by fixed and floating charges over the other property, undertaking, and assets of each guarantor. The notes were divided into three tranches: Class A1 floating-rate notes due 2008 rated Single A, Class A2 fixed-rate notes due 2023 also rated Single A and the Class B fixed-rate notes due 2026 rated BBB. The ratings were given by Standard & Poor's, Fitch IBCA and Duff & Phelps. According to the rating agencies, the ratings are based on the quality of the underlying collateral as well as the available credit enhancement. Liquidity lunch Barclays Bank provided a £25m liquidity facility, and a credit enhancement of 20%

Petroleos Mexicanos (Pemex), the Mexican state-owned company, launched a US$1.5bn four-tranche offering in early December, backed by revenues from oil sales in the US. This bond is the largest from an emerging market borrower since the start of the Russian crisis and indicates that positive sentiment towards emerging market issuers is returning. Other emerging market deals were also launched at the beginning of December. Two of the four tranches were wrapped by monoline insurers MBIA and AMBAC, and obtained AAA ratings by Moody's and S&P, enabling the borrower to break the sovereign ceiling. The other two tranches were rated at Triple B levels. The proceeds will be used to contribute to financing an investment plan for 1999, following the drop in oil prices this year.

JP Morgan completed a £400m securitisation of car loans for Standard Chartered subsidiary Chartered Trust in early December. The deal is actually the fourth tranche of the Cardiff Automobile Receivables Securitisation series which was issued between 1991 and 1993. The notes are backed by 100,000 predominantly used car loans and were issued in three tranches. The £372m senior tranche is rated triple-A, £16m Class B notes are rated A1/A+ and £12m Class C notes are rated triple-B/Baa2. The tranches were priced at 45bp, 75bp and 175bp over Libor respectively. The senior notes have a 3.24 year average life and the Class B and C notes 3.98 years. The deal was welcomed in the UK market which is still suffering from the after-effects of bond market volatility in October.

The Asian financial downturn, its impact on world financiers and markets, and big bank mergers - SBC-UBS, Citicorp-Travelers/Salomon Smith Barney, BankAmerica-NationsBank and Deutsche Bank-Bankers Trust on the way - are producing a cloudy, end-of-year crystal ball at financial houses. That includes structured finance strategies and staff. Joan Feldman reports. Cnother influence has the potential to supersede that of the mega-bank combinations, particularly from the point of view of Europeans. "The euro will have a much bigger impact than any merger," declares Jean-Marie de Charriere, MD-global head of structured finance, Warburg Dillon Read, part of the new UBS group. Perhaps, but turmoil at the banks cited above and others is having its impact. Top management at some of the merged institutions have not clarified future corporate strategies to their own satisfaction, much less that of their own foot soldiers. Moreover, the executives and boards involved in the mega-bank deals presumably felt confident they were making the right decisions at the time. However, events preceding the takeovers - but only having an impact post-takeover - are raising at least short-term questions about the assumptions. The shining examples: Citigroup and UBS AG, whose Salomon Smith Barney and (old) UBS partners' pre-merger investments are under investigation for their trading activities. So far, the partners of the three deals already concluded seem to be pursuing different tacks. A bystander says: "They're driven by internal politics and who's getting the top slots [rather than long-term strategy]. But the banks also are driven by short-term factors. Salomon's position in Citigroup was diminished because of the US$700m in third-quarter losses it suffered. Most other investment banks suffered and had their wings clipped. But for Salomon, the losses came at a critical time in the merger." Hence the transfer of former Salomon CEO Deryck Maughan to vice-chairman; the replacement of other top SSB officials and the firing of hundreds of staff, with more to come. Nor has Citigroup-led consolidation stopped. Travelers is creating an investment banking joint venture with Nikko Securities in Tokyo. Nikko Europe, however, is confident that its securitisation staff will remain intact, despite the already large job losses at other European investment banks. Despite the ferment, a US banker suggests: "The greatest potential is Citi and Salomon. Marrying a primarily asset-backed house (Salomon) to Citi's client coverage should produce significant impact. But it's early days." More narrowly, another securitisation professional has advice for John Reed and Sanford Weill, co-chairmen/co-CEOs of Citigroup. "Citi is a global leader in conduits but a minor player in public bonds and what they have done in bonds is mostly in emerging markets, with some activity in Europe. Salomon is big in the US but hasn't done much international securitisation outside the US. If there is overlap, it is in the US and that is not great, mostly in mortgage bond trading. "So it's feasible to have a separate conduit business, which uses bank credit more than bonds, which are underwritten. If I were Reed, I would put the investment banking parts together and make securitisation part of it, not commercial banking." Notably, Citi's issuing business will go to Salomon, ie in-house, just as Morgan Stanley Dean Witter's has with the Discover programme. Therefore, even if Citigroup maintains the investment and commercial banks separately, that reduces the number of potential securitisation clients. The entire securitisation market is going in-house. Life in the Citi Many things are unclear about Citigroup's future in global securitisation. But Weill told the Wall Street Journal that he wants Smith Barney to move from its current position as a non-factor in US and global investment banking to challenging the US's top three - Goldman Sachs, Merrill Lynch and Morgan Stanley - for the number one spot

The Spanish government has encountered problems with its parliamentary allies in trying to obtain approval for one aspect of the electricity deregulation law, which would allow electricity companies to issue Pta1,050bn of securitised instruments. Securitisation would permit electricity companies to cash in now on future government subsidies that they will receive in lieu of losses experienced with the growth in competition (see ISR May 1998 for details on US stranded utility cost deals). The European Union is also examining the situation with regard to competitive issues and is expected to come to a deliberation in February 1999. At the end of November, Guardian Royal Exchange put itself up for sale (?reviewing strategic options') following general bad conditions in the global insurance market, consolidation within the market as well as probable pressure from its institutional shareholders. Following the merger of other insurance groups, it seems GRE is acknowledging the need to consolidate in order to compete and has appointed Morgan Stanley to find a buyer. The company owns 100% of RETCo, the SPV. Moody's Investors Service has assigned an A3 rating to the U.S.$ 150 million Telefonica del Peru Grantor Trust certificates. The certificates are backed by future settlement payments owed to Telefonica del Peru (TDP) by various international telephone service providers.

The structure of The Export Import Bank of Korea's (Kexim) upcoming securitisation of promissory notes is starting to take shape. The deal will have a senior and a subordinated tranche - the former expected to be around $250m to $300m in size. The deal will be rated triple-A, so negotiations are now underway over the level of over-collateralisation that the Ba2/BB+ rated bank will need. The Korean Ministry of Finance has yet to confirm whether it will provide a guarantee. The pool of loans to be securitised consists almost entirely of emerging market risk but Kexim is optimistic that the deal can be done before year end. Fitch IBCA has signed a cooperation agreement ith Korean rating agency KMCC. Robin Monro-Davies, chief executive officer of Fitch/IBCA expects South Korea to be the first country to recover from the crisis in Asia and believes that financial reform in the country is picking up speed. KMCC was established in 1983 as a subsidiary of Korea Development Bank>. Credit Foncier de France plans to issue Ffr9 bn mortgage-backed securities through an SPV fonds commun de creances (FCC). The paper will be placed privately with two non-French banks by year end. Industrial Bank of Japan (IBJ) and Dai-Ichi mutual Life Insurance have announced plans to securitise the latter's property assets. Both companies will issue paper worth Y15bn backed by four commercial properties in Tokyo.

Bankers Trust and Morgan Stanley have been mandated to arrange financing for UK-based venture capital company Elba Investments. Funds are to cover the purchase of 1,428 public houses from brewer Bass. It has yet to be decided whether the deal will be a straight bond issue or a securitisation. Australia's Taxation Laws Amendment Bill is causing consternation among securitisation practitioners in the country. The bill proposes tough conditions for Australian issuers to qualify for witholding tax exemption. If the proposals become law three common trust structures will no longer qualify for witholding tax exemption: that where income is further securitised through a second trust; that where the beneficial interest is held by a charitable trust and that where securiies are listed as equity rather than debt. New Zealand-based insurer National Mutual plans to securitise part of its mortgage portfolio in the first quarter of 1999. The company made a NZ$6 million loss in its fund management business in 1998 but made substantial gains in term insurance, income protection and superannuation business. The company plans a closer global partnership with principal shareholder Axa. l Plans by Thailand-based Wongpaitoon Footwear to securitise $100m worth of export futures have been indefinitely postponed. The deal, which was to have been arranged by Daiwa Securities America, has been scuppered by the rising value of the Baht and lower Thai interest rates.

South Africa's announcement on November 2 of a programme for securitising government housing loans is expected to create the impetus that South Africa needs for an established securitisation market. According to some estimates, a market of around US$200m to US$400m is expected to be generated annually. Francesca Murra reports. There have been some securitisations in South Africa, b§e Loans (Pty) Ltd is in charge of operating this large securitisation programme, as a subsidiary of the National Housing Finance Corporation Ltd, a government-owned agency set up to help fund housing in South Africa. The loans generated by Gateway under this project are intended to provide finance for households that earn between R1,000 (US$177) and R5,000 (US$884) a month, enabling the purchase of homes between the R20,000 (US$3,537) and R50,000 (US$8,843) bracket. It is estimated that 30% of the South African population (2.5m households) falls into this lower/moderate income category, one to which traditional mortgage lenders are unwilling to extend credit. This is why such a large and important scheme has been initiated by the government and is now under way. In order for the project to work, Gateway needs the collaboration of developers, employers, pension funds and primary market lenders such as banks. According to Dr David Porteous, managing director-designate chief executive of Gateway: "We are still at the initial stages and after a year of research and feasibility studies, in August 1998 it was decided we could proceed." Gateway is now in the stage of accrediting primary market lenders and expects to offer the first loans in April 1999. Gateway requires the borrower to be formally employed with access to security from withdrawal benefits from a pension or provident fund. The reason for this is that, unusually, under this scheme loans will be secured on the borrower's pension fund. "The decision to use pension funds as collateral was taken after careful consideration and analysis of the housing market," says Porteous. Historically in South Africa, mortgages were not available for low/moderate income groups because of the risk perception and the difficulty in ascertaining property values over a 20-year period. Furthermore, there were problems with the process of foreclosure. Gateway therefore looked at the housing market and saw that for more than five or six years banks had been successfully making collateralised loans on pension schemes for small amounts of around R9,000 to R10,000, which borrowers then used to make home improvements. Gateway decided to use the same process, but on a larger scale. Furthermore, a law introduced about five years ago allowed the use of pension funds to secure loans. Certain credit protection guarantees have also been put in place for these Gateway loans. If a borrower is made unemployed and does not immediately find work, Porteous specifies that "50% of the loan would be paid out by the pension fund, whilst a credit guarantee incorporated in the loan would cover the rest of the loan". Loans are initiated by primary market lenders (banks or non-bank financial institutions) which make the credit decision, underwrite and service the loans, working with carefully laid out criteria defined by Gateway. The Gateway product also requires the collaboration of employers, as repayments are made via payroll deduction. In this way,costs are contained, loan risk is minimised and borrowers benefit from affordable interest rates. In South Africa, the practice exits for employers to allow payroll deduction for housing loans to employees. However, according to Gateway, it is difficult to know whether they are used to buy houses. Under Gateway's scheme, the loans are paid out only against transfer of property. (See Figure 1, which outlines the Gateway process.) The key characteristics of the Gateway loans, apart from the eligibility criteria mentioned above, are the following: Salary deduction and pay-over by the employer is req